Risk Assessment

Growth sustained by investment

Uzbekistan is set to remain one of the most dynamic economies in the CIS in 2018, even if official data tends to overestimate growth. Public investment, aimed at improving industrial performance and infrastructure, especially in the fields of gas, hydroelectricity, and roads, should continue to sustain activity, particularly in construction. The state could also be bolstered by multilateral donors and foreign private investors, whose confidence has been boosted by the measures taken by the new Head of State – notably the liberalisation of exchange rates and the creation of a special economic zone (Urgut district). Industry (machines, automotive equipment, agrifood) and services (almost 45% of GDP) are also likely to perform well.

The contribution of exports (almost 20% of GDP) could be improved by steady increases in export prices (for gas, cotton, and gold – the top export product). External demand might increase slightly (especially from China, Russia and Kazakhstan). However, as imports of capital goods and metals for infrastructure projects and industrial facilities will increase substantially, the net contribution of trade is likely to be nil.

Household consumption (over 50% of GDP) is expected to be sustained by the moderate rise in social spending and wages in the large public sector, as well as by the ongoing recovery in remittances from expatriate workers in Russia and Kazakhstan (likely to total about two million), offsetting the negative impact of higher prices on real incomes. Inflation is set to remain high, driven by the ongoing depreciation of the Uzbekistanti so’m (the local currency), strong credit growth, and periodic increases in the price of utilities (water, gas, electricity) that aim to align them to market prices, as well as by higher food costs generated by disrupted food production and distribution mechanisms.

Public and external accounts show a slight surplus

In 2018, the government is expected to continue its policy of stimulating activity via increased public spending. However, the public balance will continue to show a small surplus, and the public debt burden will remain weak thanks to withdrawals (amount unknown) from the Sovereign fund made since the drop in hydrocarbon prices and the recession in Russia in 2014. Nevertheless, higher revenues from the export sectors should help gradually reduce these withdrawals, as will the reforms aimed at increasing the effectiveness of public spending.

The trade balance will remain close to equilibrium. The increase in exports will more or less offset that of imports, while higher remittances from expatriate workers should help maintain a slight current account surplus. The recurrence of the surplus accounts for the comfortable level of foreign exchange reserves (about 24 months of imports, inclusive of gold) which protects the country from financial tensions.

The underdeveloped banking system is tightly controlled by the state, particularly regarding its loan policy, which weakens the quality of its portfolios. Nevertheless, it could benefit from the removal, of the so’m’s peg to the dollar in September 2017, the key to this being its 50% depreciation and its alignment to the black market rate. If trust builds in the future management of the currency, the economic actors will continue to go to the banks to convert their foreign currency assets, which can no longer be used for domestic payments, thus facilitating the de-dollarisation of the economy. Whatever happens, the sector will be supported by the government if difficulties arise.

An authoritarian regime but anxious to attract foreign investors

The death of Islam Karimov in September 2016, president since the country’s independence in 1991, resulted in Prime Minister Shavkat Mirziyoyev becoming the Head of State after a comfortable election victory (89% of the votes) in December 2016. Like his predecessor, he is expected to maintain a strong state. However, putting an end to a decade of isolationism, he has moved to establish closer relations with neighbouring countries, in particular Kirghizstan and Tajikistan, with which agreements on water management, communication channels, the electricity network, and border disputes have been concluded or are currently being negotiated. Likewise, relations with Russia are now closer, but are not expected to overshadow relations with the West or the healthy relationship with China.

The key priority is economic development. Indeed, the president seems to favour economic reforms aimed at attracting investors. This is evidenced by removing the so’m’s dollar peg and most of the foreign exchange control measures. However, economic openness is still tentative. Removing the peg does not predict how foreign exchange will be managed in the future. State-owned enterprises continue to dominate, despite their inefficiency. Red tape and difficulties due to customs persist, and performance in terms of corruption, regulation, and government effectiveness remains poor. The risks linked to the rise of Islamist groups is likely to endure. Meanwhile, poverty, unemployment and restrictions on freedoms provide fertile territory for protests by a very young population (almost half of which is under 25 years old), which the government will do everything to control.